Gift Tax

What is gift tax?

When people give money or property to another person, they typically make the gift without thinking about tax consequences. For smaller gifts, this isn’t a problem. However, for larger gifts, the IRS may require that the giver pay a gift tax on what they give.

This tax can be required when giving gifts valued over the IRS’s annual exclusion or lifetime gift tax exemption limit, including:

Stocks
Investments
Real estate
Vehicles
Collectibles

Individuals can avoid paying the gift tax by keeping their gifts to each recipient under the threshold for the year. The IRS adjusts its annual and lifetime gift tax exclusion limits every year, so be sure to review the current limits before making your gift.

If your gift exceeds the current annual gift tax exclusion limit, you’ll need to file a gift tax return with the IRS.

Gift tax FAQs

What are gift tax limits?

Gift tax limits are annual or lifetime limits the IRS places on gifts given to one person by another. The IRS adjusts the limits each year to reflect inflation and changing monetary values. If a person gives more than the annual or lifetime limit to a single person, they may have to pay a gift tax on the amount that exceeds the limit. Gift tax rates vary depending on the value of the gift.

Why is there a gift tax?

The goal of the gift tax is to keep people from giving their entire estate to their preferred beneficiaries before they die in an attempt to avoid paying estate taxes. However, just because you can’t gift all of your assets to another person without paying the gift tax doesn’t mean there aren’t things you can do to reduce your tax liability. It starts with building a comprehensive estate plan and getting advice from an estate planning attorney.

Who pays the gift tax?

The giver pays the gift tax to the IRS if applicable. The recipient of the gift does not typically have to claim the gift or pay the gift tax on what they receive.

Are there exceptions to the gift tax rule?

Yes. Individuals can avoid gift tax by giving an unlimited amount to the following:

Their spouse if the spouse is a U.S. citizen
IRS-approved charities and 501(c)(3) organizations
An individual to cover medical expenses if paid directly to the medical provider
An individual to cover education expenses if paid directly to the school
Political organizations

Are monetary gifts tax-deductible?

If you’re giving money to an individual, the gift is typically not tax-deductible, even if you pay the gift tax on the gift. However, donations to qualified charitable organizations and non-profits may be tax-deductible, even if they exceed the IRS’s annual exclusion amount.